Opinion
No. MDL-1446, Consolidated Civil Action No. H-01-3624.
August 9, 2005
BERG ANDROPHY, Joel M. Androphy, Thomas C. Graham, Houston, Texas, Lawrence Byrne, Owen C. Pell, Lance Croffoot-Suede, Ruth E. Harlow, WHITE CASE LLP, New York, Attorneys for Deutsche Bank AG, Deutsche Bank Securities Inc., and Deutsche Bank Trust Company America.
As demonstrated below, Lead Plaintiff has misled this Court down an extraordinary path. It has pushed this Court to accept as "factual allegations" arguments in a brief that have no support in fact, to "reinstate" a claim that is not now and never has been pled in the Amended Complaint, to allow that claim despite at least three missing elements, and to order defendants to proceed in this litigation without any pleading of the claim, let alone a proper pleading under the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act ("PSLRA"). Because of this extraordinary wrong turn, provoked by Lead Plaintiff's motion for reconsideration, Deutsche Bank makes this motion for reconsideration to urge that these multiple errors be corrected at the earliest possible juncture.
INTRODUCTION AND SUMMARY
On July 26, 2005, the Court granted Lead Plaintiff's motion for reconsideration (#2101) of the Court's March 29, 2004, order (#2036) that had dismissed claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Deutsche Bank defendants. The Court granted the motion for reconsideration even though it explicitly found that the allegations pled in the First Amended Consolidated Complaint ("Amended Compliant" or "Am. Compl.") were deficient under Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004). July 26 Opinion and Order ("Recon. Op.") at 6. The sole basis for reversing the dismissal of the securities fraud claims against Deutsche Bank was a brief with exhibits (#2698) concerning Paul Cambridge that Lead Plaintiff filed after Cambridge's deposition.See Recon. Op. at 8.
The Deutsche Bank Entities respectfully submit that the Court erred in granting Lead Plaintiff's motion for reconsideration. First, the contentions made in Lead Plaintiff's post-complaint brief regarding Cambridge could not — even if alleged in a complaint — satisfy the scienter pleading requirements under Section 10(b), the PSLRA, and Southland. There is no factual allegation or factual (or logical) support for the assertion that Cambridge knew that the six structured tax transactions ("SSTs") were "fraudulent" or a "sham." Lead Plaintiff has misled the Court with regard to the allegations that can legitimately be made about Cambridge's knowledge, and for that reason alone the Court should reconsider and reinstate its prior dismissal of the fraud claims against Deutsche Bank.
The Deutsche Bank defendants ("Deutsche Bank Entities") sued in Newby are Deutsche Bank AG, Deutsche Bank Securities Inc. (formerly known as Deutsche Bank Alex. Brown LLC), and Deutsche Bank Trust Company Americas.
Second, the purported Section 10(b) claim that Lead Plaintiff is attempting to add to this litigation also lacks factual contentions sufficient to allege loss causation, another required element of any Section 10(b) claim. The Court cannot allow a claim that fails as to loss causation under Dura Pharm., Inc. v. Broudo, 125 S. Ct. 1627 (2005).
Third, this Court must, at a minimum, require Lead Plaintiff to file a Second Amended Complaint. Not just isolated elements are lacking, but rather the Section 10(b) claim as now posited by Lead Plaintiff appears nowhere in the Amended Complaint. Cambridge's asserted role does not appear there, nor does any allegation of a specific Section 10(b) violation because of misrepresentations by Deutsche Bank, stemming from the SSTs, in the Osprey, Marlin or Yosemite offering memoranda ("OMs"). Contrary to black letter law that the Court has noted and respected in this matter, Lead Plaintiff has here convinced the Court to allow "amendment" of the complaint through a brief. This result puts the Deutsche Bank Entities in the position of having no pleading to which they can respond, to guide their discovery, or, if need be, to counter with a summary judgment motion.
In its 2003 decision on motions to dismiss filed by individual Arthur Andersen partners, the Court acknowledged that `"it is axiomatic that [a] Complaint cannot be amended by the briefs in opposition to a motion to dismiss.' In re Baker Hughes Sec. Litig., 136 F. Supp. 2d 630, 646-47 (S.D. Tex. 2001)." In re Enron Corp. Sec., Derivative "ERISA" Litig., 2003 WL 230688 at *5 n. 9 (S.D. Tex. Jan. 28, 2003). The Court there went on to distinguish a true amendment of the complaint itself: "Nevertheless, the Court notes that it may grant leave to a party to amend its pleadings where justice requires under Fed.R.Civ.P. 15(a)." Id. No true amendment of the governing complaint has been ordered here.
Established principles of federal procedure forbid this method of cut-and-paste "pleading by brief." As the Court has ordered at least twice before in this case, a complaint must be formally amended if Lead Plaintiff requires allegations outside the complaint as pled to defeat a motion to dismiss. See In re Enron Corp. Sec., Derivative "ERISA" Litig., 235 F. Supp. 2d 549, 703, 708 (S.D. Tex. 2002) (requiring Lead Plaintiff to amend its complaint regarding Merrill Lynch); In re Enron Corp., 258 F. Supp. 2d 576, 644 (S.D. Tex. 2003) (requiring amendment of the complaint regarding control person allegations).
Because the Court's order on the prior reconsideration motion has allowed a fraud claim supported by insufficient factual allegations — under Southland, under Dura, and even under the "creator" test earlier adopted by this Court — to survive and because Lead Plaintiff has not even tried to formally plead that claim in the governing complaint, the Court should reverse or, at a minimum, modify its ruling against the Deutsche Bank Entities. To defer to a possible later, post-judgment appeal the correction of these legal errors would greatly prejudice the Deutsche Bank Entities and waste the Court's judicial resources. See Zimzores v. Veterans Admin., 778 F.2d 264, 266 (5th Cir. 1985), cited with approval in Recon. Op. at 3 n. 4. I. LEAD PLAINTIFF HAS NOT MET THE SOUTHLAND TEST TO STATE WITH PARTICULARITY FACTS GIVING RISE TO A STRONG INFERENCE THAT CAMBRIDGE ACTED WITH SCIENTER
The Court may modify or rescind an interlocutory order at any time if errors, here concerning the application of recent precedent and proper procedure, are called to its attention.See Recon. Op. at 3 n. 4.
The Deutsche Bank Entities style this a Partial Motion for Reconsideration because they do not ask the Court to here reconsider the July 26, 2005, ruling with regard to subject matter jurisdiction. The Deutsche Bank Entities will defer revisiting that issue until more fact-specific contexts arise. A narrower, more specific subject matter jurisdiction question — based solely on a Section 12(a)(2) claim with regard to overseas sales under a Reg S offering — is already pending before the Court on Frankfurt Trust's motion to intervene.
Because Lead Plaintiff has mischaracterized the factual allegations — as compared with bald, conclusory allegations — that it can allege with regard to Cambridge, this Court has been led to a misapplication of the PSLRA and Southland that must be corrected. In granting the motion for reconsideration, the Court relied on Lead Plaintiff's incorrect contention that Cambridge "approved the [offering] documents even though he knew about the fraudulent tax transactions and their effect on Enron's financial statements." Recon. Op. at 8 (emphasis added). Specifically, Lead Plaintiff represented to the Court that Cambridge "received many memoranda indicating that Enron was recognizing specific amounts of pre- and post-tax accounting income from tax transactions with no legitimate business purpose." Id. (emphasis added). Lead Plaintiff also intimated that Cambridge "was keenly aware that Enron's Class Period financial results were false." See id. at 4 (emphasis added). Yet Lead Plaintiff's brief and attachments are barren of any factual support for these assertions that Cambridge knew about fraud, no legitimate purpose, or falsity with regard to the SSTs or their impact on Enron's financial statements.
Contrary to Lead Plaintiff's representations, the documents or other information that Cambridge received about the SSTs did not discuss or reveal any falsity or illegitimacy or illegality.See Lead Plaintiff's Second Supplemental Filing ("Pl. 2d Supp.") (#2698) Ex. 2-9. Nor did Lead Plaintiff develop at Cambridge's deposition any knowledge of such alleged "falsity" by Cambridge. Lead Plaintiff could not, under Rule 11(b)(3), allege in a complaint that Cambridge knew of deception in the SSTs or Enron's financial statements because Lead Plaintiff has no evidentiary support whatsoever for that allegation. As such, Lead Plaintiff's assertions cannot be the basis for adequately pleading scienter in Cambridge, and thus the posited Section 10(b) claim cannot satisfy the stringent pleading requirements of the PSLRA and Southland.
As the Fifth Circuit emphasized in Southland, the PSLRA requires that a complaint, to survive, "must `state with particularity facts giving rise to a strong inference'" that the individual corporate employee who allegedly made or caused the making of a misrepresentation acted with scienter. 365 F.3d at 364, 366-67. "Scienter" means "an `intent to deceive, manipulate, or defraud' or that `severe recklessness' in which the `danger of misleading buyers or sellers . . . is either known to the defendant or is so obvious that the defendant must have been aware of it.'" Id. at 366. This subjective, "required state of mind must actually exist in the individual," and is not a matter of constructive knowledge or imputed bad intent. Id. at 366-67. Lead Plaintiff's submissions, however, have not given this Court any factual basis for the notion that Cambridge knew that, or was consciously avoiding an obvious fact that, the SSTs were "shams" and therefore Enron's financial statements were misleading. Without any evidentiary support for Cambridge knowing about falsity, deception, or illegitimacy in the financial statements, Lead Plaintiff cannot plead facts giving rise to a strong inference of scienter.
The `"knowledge necessary to form the requisite fraudulent intent must be possessed by [the relevant corporate employee] and cannot be inferred and imputed.'" Southland, 365 F.3d at 367 (quoting Gutter v. E.I. Dupont De Nemours, 124 F. Supp. 2d 1291, 1311 (S.D. Fla. 2000)) (emphasis added). Here, knowledge of the SSTs is far from knowledge that those transactions were illegitimate and that Enron's financial statements were improperly distorted thereby — Lead Plaintiff cannot allege that Cambridge had the latter, crucial knowledge, which would be necessary for a strong inference of scienter in the factual scenario that Lead Plaintiff posits. See Southland, 365 F.3d at 377-78 (rejecting scienter allegations in part because, although defendants may have known about forecasted earnings growth, there was no factual allegation that gave them knowledge about improper amortization or that earnings statements were false).
See also, e.g., City of Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245, 1263-65 (10th Cir. 2001) ("the important issue . . . is not whether Defendants knew the underlying facts, but whether Defendants knew that not disclosing" information about the transaction would be misleading) (emphasis in original); Higginbotham v. Baxter Int'l, Inc., No. 04-C-4909, 2005 WL 1272271 at *5 (N.D. Ill. May 25, 2005) ("[t]here are no specific allegations that would support that Greisch could discern from these reports that they contained false information"); In re Noven Pharm., Inc. Sec. Litig., 238 F. Supp. 2d 1315, 1324 (S.D. Fla. 2002) (despite references to reports and meetings, "allegations are conclusory and fail to adequately indicate that Defendants knew the falsity of their statements at the time they were made").
In place of actual facts relating to Cambridge's knowledge, Lead Plaintiff submitted conclusory excerpts from an interim Examiner's report to attempt an improper bootstrap. The Court then relied on those excerpts in finding a strong inference that Cambridge had acted with scienter. Recon. Op. at 8. But Lead Plaintiff is trying to substitute the bankruptcy Examiner's opinion today for information that Cambridge never received in 1997-99. That effort is infirm under Southland and should be rejected. The Examiner, in the context of Enron's bankruptcy, found reason to disagree with the Deutsche Bank Entities, other public corporations, the Federal Reserve Bank of New York, the Federal Reserve Board, the Internal Revenue Service, multiple accounting firms, and multiple law firms, in questioning the SSTs. But the Examiner nowhere states or suggests or even raises an inference that Cambridge knew that there was any doubt about the validity of those transactions, let alone that Cambridge knew the transactions were in fact illegitimate. The Examiner's report on the SSTs simply says nothing at all about Cambridge — and Cambridge's actual state of mind when he acted is the issue.
Indeed, the Examiner himself concluded that Enron's disclosure of the SSTs was "inadequate only to the extent that [and only if] the GAAP accounting for these transactions was incorrect." Second Interim Report, App. D at 69; see also id. at 72. It thus follows that unless Cambridge — an individual not trained in accounting and not involved in the SSTs — could somehow have known that Enron's accounting was incorrect (which still remains to be determined for purposes of this case), Cambridge could not have known of the "falsity" of the information. The notion that Cambridge in 1997-99 could have known more about the proper accounting for the SSTs than Enron's auditor or the many other accounting experts who also weighed in on the accounting at that time, is nowhere supported by any facts pled by Lead Plaintiff, and is ludicrous on its face.
In citing Deutsche Bank's due diligence procedures to the Court, Lead Plaintiff is similarly implying that Cambridge "should have known" or that knowledge in others at Deutsche Bank "should be imputed" to Cambridge, but neither method of attempting to graft constructive knowledge on to Cambridge is permitted under the governing scienter law. See Goldstein v.MCI WorldCom, 340 F.3d 238, 253-54 (5th Cir. 2003) (rejecting "should have known" approach to scienter as insufficient and emphasizing that actor "must know that it is publishing materially false information" or act with severe recklessness — i.e., consciously disregard information that would make that falsity obvious). The due diligence policy is not probative of any particular employee's actual state of mind.
Likewise, neither negligence (or even "gross mismanagement") nor an alleged accounting violation establishes a strong inference of scienter. Goldstein, 340 F.2d at 253-54; see also Southland, 365 F.3d at 366 (neither `"simple or even inexcusable negligence"' is enough to support scienter); Fine v. Am. Solar King Corp., 919 F.2d 290, 297 (5th Cir. 1990) ("inaccurate accounting figures, or a failure to follow GAAP, without more, does not establish scienter"). Thus, the after-the-fact conclusion of one non-expert observer, the bankruptcy Examiner, that he finds "no reasonable basis for characterizing such income [related to the SSTs] as pre-tax income" is not probative of whether Cambridge acted with scienter. Cf. Recon. Op. at 8. The Examiner's conclusion was obviously not known to Cambridge, and the standard at issue here is neither reasonableness nor compliance with accounting requirements. Moreover, Cambridge is not an accountant, and his testimony under oath — submitted by Lead Plaintiff — makes clear that Cambridge had no basis for assessing compliance with any accounting rules. Pl. 2d Supp., Ex. 2 at 424-26. As inSouthland, there is a factual gap that defeats a valid pleading of scienter because Lead Plaintiff cannot find any evidentiary support for Cambridge's knowledge of the "proper way" to reflect the SSTs in Enron's financial statements or knowledge that the "earning statements were false when made." 365 F.3d at 378.
Indeed, the Court has previously recognized that the SSTs are complex transactions and that Lead Plaintiff's allegations of their illegitimacy are highly contested. In re Enron Corp., 310 F. Supp. 2d 819, 835, 839 (S.D. Tex. 2004). Simply knowing about the transactions and that Enron would recognize "specific amounts of pre- and post-tax accounting income," or that it sought financial accounting benefits from the transactions, would not inform Cambridge of any impropriety or falsity. Cf. Recon. Op. at 8. As Lead Plaintiff knows from its discovery, the SSTs have been reviewed by the Federal Reserve and the Internal Revenue Service, have been mimicked by other public corporations, and have never been held by any agency or court to be unlawful or to violate tax, accounting, or securities laws. See Deutsche Bank Entities' Response to Lead Plaintiff's Second Supp. Notice (#2824) at 4-8.
Here, the Court has been mislead by Lead Plaintiff injecting the words "fraudulent," "sham" or "no legitimate business purpose" into its contentions when there is no factual support that Cambridge knew or consciously disregarded anything of the kind. The Fifth Circuit has repeatedly emphasized that `"conclusory allegations, unwarranted deductions, or legal conclusions"' cannot satisfy the PSLRA's pleading requirements, especially with regard to scienter. R2 Inv. LDC v. Phillips, 401 F.3d 638, 642 (5th Cir. 2005) (quoting Southland, 365 F.3d at 361). To uphold Lead Plaintiff's allegation of scienter would eviscerate Southland's exacting requirements as to the individual corporate actor's actual state of mind.
II. NEITHER THE AMENDED COMPLAINT NOR LEAD PLAINTIFF'S NOVEMBER 2004 BRIEF INCLUDES LOSS CAUSATION ALLEGATIONS THAT WOULD SATISFY DURA , NOR CAN THEY BE PLED NOW
Highlighting the danger of examining a purported claim that has never actually been pled in a complaint, Lead Plaintiff convinced this Court to allow a Section 10(b) claim to go forward without any factual allegations that could establish loss causation, another required element.
The Deutsche Bank Entities have raised the lack of adequate loss causation allegations since their motion to dismiss the Amended Complaint. (#1621) The Section 10(b) claim that Lead Plaintiff now tries to pursue has changed since the pleading of the Amended Complaint, but continues to lack sufficient factual contentions to support loss causation by the Deutsche Bank Entities.
Lead Plaintiff cannot point to general allegations in the Amended Complaint to cure this problem. In Dura, the Supreme Court held that pleading an artificially inflated securities price at the time of purchase is "legally insufficient" to allege loss causation. 125 S. Ct. at 1634. Yet in language virtually identical to the allegation rejected in Dura, the Amended Complaint pleads the cause of its alleged Section 10(b) losses as follows: "Plaintiffs . . . have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices in connection with their purchase of Enron securities." Am. Compl. ¶ 997; see also id. at ¶¶ 795-96, 799; cf. Dura, 125 S. Ct. at 1630 (complaint alleged that `"In reliance on the integrity of the market, [the plaintiffs] . . . paid artificially inflated prices for Dura securities and the plaintiffs suffered `damage[s]' thereby.'") (alterations in opinion).
Moreover, Lead Plaintiff cannot attempt to connect the Deutsche Bank Entities to alleged losses by referring to a single overarching "scheme" in the case or to the defendants as a group. The Court has earlier recognized that Lead Plaintiff's allegations with regard to Deutsche Bank concern a discrete SST-related scheme. See In re Enron Corp., 310 F. Supp. 2d at 843. In addition, the Court has held that, even where a scheme or schemes are alleged, a particular defendant cannot be liable unless it committed a "key act that itself violated § 10(b) and Rule 10b-5." In re Enron Corp., 235 F. Supp. 2d at 589 n. 31. This follows from Central Bank's holding that circumscribes the potential liability of non-issuers like banks and forbids aiding and abetting claims. A bank `"may be liable as a primary violator under [Section 10(b) and Rule] 10b-5, assuming all of the requirements for primary liability . . . are met.'" 235 F. Supp. 2d at 582 (quoting Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994)). Those requirements include the elements of scienter and loss causation. See 235 F. Supp. 2d at 571;Dura, 125 S. Ct. at 1631-34.
Lead Plaintiff's repeated references in the Amended Complaint and in filings with this Court to a single "scheme" among all the defendants are conclusory and unsupported by concrete factual allegations as to the Deutsche Bank Entities. Similarly, Lead Plaintiff refers to an "Enron Ponzi scheme" as if it has alleged facts showing that each defendant knew about and decided to participate in a "Ponzi scheme," when factual allegations to support that are utterly lacking. As discussed below, Lead Plaintiff has not even alleged all of the elements of a basic misrepresentation claim or of a Deutsche Bank-specific scheme here, much less made allegations that would support Deutsche Bank liability for some larger enterprise — of which, in fact, it was not a part.
According to the theory that Lead Plaintiff has now cobbled together, the act that can trigger primary liability in a Deutsche Bank defendant is Cambridge's alleged failure to disclose the "false" impact of the SSTs on Enron's financial statements when those financial statements were incorporated in later OMs involving Deutsche Bank. While Cambridge's alleged failure might be enough to support transaction causation (a separate element) for the purchasers of securities under those OMs, there is no basis in Lead Plaintiff's brief and exhibits (#2698), or in the Amended Complaint, to connect that alleged misrepresentation by a Deutsche Bank actor to any of the alleged class losses. Cambridge's alleged failure to disclose "sham" tax transactions never came to light during Enron's downfall, nor was that downfall caused by any inappropriate use of tax benefits. As Lead Plaintiff's own description of events reveals, poor Enron investments in Dabhol, Broadband, New Power, and other assets, revelations about specific off-balance-sheet entities and particular types of questionable transactions (but not the SSTs), and a debt and cash flow crisis contributed to the falling value of Enron securities. See, e.g., Lead Plaintiff's Response to Royal Bank of Canada's Submission of Supplemental Authority Regarding Motion to Dismiss at 10-15. Nowhere in this mix is any link — much less a link establishing proximate cause — to Cambridge's failure to disclose the SSTs. The market did not react to any information about or any alleged "harms" caused by the SSTs. Moreover, those Deutsche Bank transactions were different in kind — and in time — from the deals that were revealed and that at least arguably caused investor losses.
Lead Plaintiff repeatedly attempts to conflate transaction causation and loss causation. The conclusion that investors may have relied on certain information in the course of their purchase, however, says nothing about whether later losses were proximately caused by a misrepresentation contained therein. Indeed, in this case, Lead Plaintiff alleges that the SSTs purportedly altered Enron's income statement in a misleading way, but there is and can be no allegation that those transactions affected cash flow, debt, or credit ratios, the sources of Enron's later troubles.
The SSTs themselves cannot be considered for loss causation purposes, because those transactions are untimely and cannot be the act that could establish primary liability on Deutsche Bank's part. In re Enron Corp., 310 F. Supp. 2d 819, 833, 859 (S.D. Tex. 2004). Instead, under its new theory crafted in response to that untimeliness, Lead Plaintiff would have to put forward factual allegations that could show that Cambridge's alleged misrepresentations and failure to disclose the SSTs proximately caused class losses.
Scienter and loss causation are not the only elements missing from Lead Plaintiff's "Cambridge-based" theory of primary liability. Even assuming that the "creator" approach to responsibility for misrepresentations applies, which the Deutsche Bank Entities do not concede, Lead Plaintiff cannot satisfy the creator requirement. This Court has adopted the "SEC's proposed test" and allowed liability as a primary violator to be pled if the person acted with scienter and `"the person played such a substantial role in the creation of the statement that the person could fairly be said to be the `author' or `co-author' of the statement [even if it is not publicly attributed to him], and the other requirements of primary liability are satisfied."' 235 F. Supp. 2d at 591, 586, 588. Cambridge played no role whatsoever in "authoring" Enron's financial statements. The OMs from the deals he worked on simply incorporated Enron's statements that had already been filed elsewhere — and stated that Enron, not the Deutsche Bank Entities, was responsible for its financial representations. Thus, alleged misstatements in Enron's financials in the OMs cannot be the source of Deutsche Bank liability.
The Second Circuit has adopted an even more stringent "bright line" standard, which requires that to succeed with a Section 10(b) claim against a secondary actor like a bank, `"the misrepresentation must be attributed to the specific actor at the time of public dissemination."' In re Enron Corp., 235 F. Supp. 2d at 583 (quoting Wright v. Ernst Young LLP, 152 F.3d 169, 175 (2d Cir. 1998)). In this instance, Lead Plaintiff is attempting to hold Cambridge and Deutsche Bank responsible for financial statements that were attributed to Enron in the subject OMs, and thus the claim would clearly fail to satisfy the "bright line" approach.
Because Lead Plaintiff's latest contentions against Deutsche Bank, raised through post-complaint briefing, do not allege facts that could support all of the elements required for federal securities fraud liability, the Court erred in granting the motion for reconsideration and instead should dismiss the 1934 Act claims against the Deutsche Bank Entities.
III. THE SECTION 10(b) CLAIM THAT LEAD PLAINTIFF NOW PURPORTS TO BRING AGAINST THE DEUTSCHE BANK ENTITIES IS NOT ALLEGED IN THE AMENDED COMPLAINT; IF IT IS NOT DISMISSED OUTRIGHT, LEAD PLAINTIFF MUST BE REQUIRED TO ATTEMPT TO PLEAD THAT CLAIM
The Court's decision on the motion for reconsideration explicitly finds that critical allegations are missing from the Amended Complaint. Recon. Op. at 6 ("Lead Plaintiff's First Amended Consolidated Complaint has not pointed to such an individual, named or not, for purposes of liability of the Deutsche Bank Entities, no less shown scienter on that official's part, [in] making misrepresentations and omissions during the Class Period"). Only with the addition of numerous factual contentions discussed solely in a post-complaint brief might Lead Plaintiff's alleged facts be deemed sufficient to state a Section 10(b) claim. See id. at 8. As the Court has recognized in the past, the proper way to proceed — even if the new, extra-complaint allegations would be sufficient — is to require a formal amendment of the pleading. In re Enron Corp., 235 F. Supp. 2d at 708; In re Enron Corp., 258 F. Supp. 2d at 645.
Without a formal and coherent pleading of the scattered allegations that Lead Plaintiff now attempts to use against Deutsche Bank, there is not an established foundation for this litigation. The Deutsche Bank Entities should not be forced to litigate against a moving target that has never been definitively set forth as required under the Federal Rules. Neither defendants nor the Court should have to edit or to "cut and paste" the plaintiff's complaint and its motion papers to attempt to determine the true scope of the allegations. At present, the Deutsche Bank Entities do not have a complete set of factual allegations to answer or to contest as the litigation progresses.
The Court's July 26 Opinion and this brief use the term "allegations" loosely. See Recon. Op. at 8. Even in Lead Plaintiff's post-complaint brief (#2698), it has not set forth paragraph-by-paragraph allegations of specific facts, but has instead presented a discursive discussion that apparently incorporates its new "allegations."
To proceed without a complaint that includes full and precise allegations regarding scienter, and all the other elements of primary Section 10(b) liability, also would violate the PSLRA.See 15 U.S.C. § 78u-4(b)(2) ("In any private action arising under this Chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this Chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind").
This Court should follow its own, correct precedents in this case and order a Second Amended Complaint within 30 days. See 235 F. Supp. 2d at 703; 258 F. Supp. 2d at 644; see also Milano v. Perot Systems Corp., No. 3:02-CV-1269-D, 2004 WL 2360031 at *10-11 (N.D. Tex. Oct. 19, 2004) (rejecting scienter allegations under Southland in complaint drafted before that decision, dismissing the claim, but giving plaintiffs an opportunity to plead an amended complaint). The now-running 30-day period for the Deutsche Bank Entities to answer the insufficient Amended Complaint should be suspended. Once Lead Plaintiff has set forth additional allegations in a formal complaint, the Deutsche Bank Entities can respond to that Second Amended Complaint per the Federal Rules and the orders of this Court.
CONCLUSION
For all the foregoing reasons, the 1934 Act securities fraud claims against the Deutsche Bank Entities should be dismissed with prejudice.
In the alternative, Lead Plaintiff should be required to plead in full the Section 10(b) allegations that it now asserts against Deutsche Bank. The Deutsche Bank Entities deadline to answer the Amended Complaint should be suspended, and those entities should not be required to respond to the revised allegations until after receipt of the Second Amended Complaint.